DOL Fee Guide Proposal Misses the Point, Some Say

A summary approach to fee disclosures would be very helpful
to plan sponsors, says Kevin Watt, senior vice president of Security Benefit’s
defined contribution group. “The first round of 408(b)(2) needed some
guidance,” he tells PLANADVISER. “We realized plan sponsors received
disclosures from covered service providers from multiple places: third-party
administrators, advisers, recordkeepers and other parties.”

In March, the Department of Labor (DOL) issued a
call for comments about a proposal to include a guide or summary with the
disclosures to plan sponsors. Phyllis Borzi, assistant secretary of labor for
the DOL’s employee benefits security administration said the agency did not
intend for providers to offer a master list of services and fees and have plan
sponsors figure out which services they are using and paying for (see “A Conversation with
the DOL”). The proposal calls for a summary that would streamline the
disclosures to avoid length and complexity, or a guide to help plan sponsors
know where to find specific fee data in the disclosures.

The disclosures plan sponsors received were fragmented, and
the summary guide is a good idea, Watt says. “It would help plan sponsors
understand who is working on their plans.”

But
so far, Watt says, “the outcome of fee disclosure has been lopsided.” The
408(b)2 regulations show only half the story—the disclosures put the emphasis
on costs and omit any discussion of value for that cost. If the proposal
is adopted, plan sponsors will want to ask providers to specify the role they
play and what services they give.

“Plan sponsors, particularly small ones, are somewhat
confused about what services are offered and the actual services being
provided,” Watt says. A recordkeeper should state in plain language the services
included for a sponsor’s plan, such as maintaining participant accounts on the
website, keeping track of participant records and vesting schedules.

Adding the services and value would be an opportunity for
both plan sponsors and for providers, Watt says. It would be an opportunity for
plan sponsors to gain a better understanding of what they get, and covered
service providers would have an opportunity to explain why the fees are there,
and what services they provide to support the retirement plan.

It is a misconception that people pay attention to fees
alone without considering value, James Sampson, managing principal of
Cornerstone Retirement Advisors, tells PLANADVISER. “Fees are only high in the
absence of value,” he says. Taking value out of the equation is a mistake.
After all, Sampson says, “you don’t go into a restaurant and ignore the left
side of the menu. [You ask] 'What do I want to eat'—not, what does it cost?”

Leaving out this evaluation for the plan sponsor on a
one-page summary for 408(b)(2) is useless; equally important as disclosing fees
is disclosing their value, he contends. Sampson also points out that a
small-company plan sponsor without a committee, or employers that manage the
401(k) in-house may be at a disadvantage. They may not be able to handle a
summary sheet on top of the full disclosure to the same extent as a plan that
has an engaged committee or a plan with an active adviser, he says.

Sampson
feels components of 408(b)2 provider fee disclosures to plan sponsors are not
nearly as broken as 404(a)(5) plan sponsor fee disclosures to participants. “If
we’re just looking at the cost and benefits of a participant statement, we have
an exorbitant cost for zero benefit because no one reads them,” he says.

“The participant notices absolutely need to be revamped,” he
says. “What sticks out to me is that 404(a)(5) should
be a one-page summary, because the employee really doesn’t have a whole lot of
impact on their account.”

Streamlining 408(b)(2) is going after the wrong piece of the
puzzle, Sampson states. The DOL should be focusing on the disclosures to
participants. “You can’t give an employee a 10-page disclosure and expect them
to understand it,” he says. “If we do all these things at the plan level and
the participant never reads it, why are we doing it?” The end result is
dysfunction, he says.

Watt agrees there needs to be more clarity for participants
about the fees they pay. He feels giving fee disclosures to participants is a
great idea, but it doesn’t provide an opportunity to show participants the
value of what they receive. “There needs to be more balance around plan
sponsors, who are trying to provide a benefit to their employees, showing the
value,” he says. “The disclosures don’t explain investment return. If you focus
just on cost without looking at return or value, it’s a one-sided view.”

There’s no way to know if outlining the value and services
participants receive for their costs will ever be accomplished, Watt says, but
he suggests it as a best practice for providers. “Make it easy to understand,”
he says, “but also show the value.”

The
proposed regulation really addresses just plan sponsors, Watt says. The
participant notices need to be more summarized than they are. Looking at the
progression of fee disclosures from 2012, he says, “I think we’ll continue to
improve on that idea and really take it to a balanced approach, balancing the
value for the cost you’re paying.”